On January 1, 2016, Happy Tubs sold a hot tub to Monica, receiving a two-month,
ID: 2451607 • Letter: O
Question
On January 1, 2016, Happy Tubs sold a hot tub to Monica, receiving a two-month, noninterest-bearing note in exchange for a hot tub that normally sells for $8,000. The note is for an amount that achieves an effective interest rate of 10% per year.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare any adjusting entry necessary on December 31, 2016.
3. Prepare any adjusting entry necessary on December 31, 2017.
The Foxworthy Corporation uses a periodic inventory system and the LIFO inventory cost method for its one product. Beginning inventory of 40,000 units consisted of the following, listed in chronological order of acquisition:
During 2016, inventory quantity declined by 18,000 units. All units purchased during 2016 cost $8.00 per unit.
Required:
Calculate the before-tax LIFO liquidation profit or loss that the company would report in a disclosure note assuming the amount determined is material.
Explanation / Answer
Effective interest rate 10% = 9.564% annual rate = 0.797 % per month rate Check EAR = (1.007)^12-1 = 0.100 So for Notes payable 0.079% monthly bank rate will be chargable Accounts receivable amount 8000 Interest on AR amount for 2 months 127.52 Total Notes Receivable Amount 8127.52 Jornal entry for sales Account title Dr $ Cr $ Sales 8,000.0 Accounts Receivable 8,000.0 Accounts receivable 8,000.0 Notes Receivable 8,127.5 Accrued Interest Income 127.5 After two months when cash received for Notes receivable Cash 8,127.5 Notes Receivable 8,127.5 Accrued Interest Income 127.5 Interest Income 127.5 As the notes realized in two months no adjustment entries required on Dec 31. 2016. or Dec31. 2017. LIFO Liquidation Profit Liquidated 18000 units Current Cost 8 per unit Liquidation details Liquidation qty Cost/Unit Current Cost/unit LIFO profit/Unit Total LIFO liquidation Profit 16,000 7 8 1 16,000 2,000 6 8 2 4,000 Total 18,000 20,000 Total LIFO liquidation Profit $ 20,000